Uber’s arbitration appeal at the 2nd Circuit is big test for Internet businesses

(Reuters) - In the age of the mobile app, should courts change their expectations of what it means for a customer to assent to a seller’s terms and conditions? Is it even possible to expect that consumers rushing to download an app will read small-print legalese on their phones?

U.S. District Judge Jed Rakoff of Manhattan put those questions in play last August, when he refused to send an antitrust class action against Uber and the ride-sharing service’s CEO to arbitration. Though Uber passengers are informed on the app’s registration screen that they agree to the site’s terms of service – including mandatory arbitration of disputes – when they click the registration button, Judge Rakoff said Uber did not give customers fair warning that its terms require passengers to waive their right to sue in court.

The judge didn’t stop there, however. He went on to expound on the perils of mandatory arbitration clauses buried in the hyperlinked gobbledygook of online “agreements” between Internet businesses and their customers. “Since the late 18th century, the constitution of the United States and the constitutions or laws of the several states have guaranteed U.S. citizens the right to a jury trial,” Judge Rakoff wrote. “This most precious and fundamental right can be waived only if the waiver is knowing and voluntary, with the courts ‘indulging every reasonable presumption against waiver.’ But in the world of the Internet, ordinary consumers are deemed to have regularly waived this right, and, indeed, to have given up their access to the courts altogether, because they supposedly agreed to lengthy ‘terms and conditions’ that they had no realistic power to negotiate or contest and often were not even aware of.”

Uber and its CEO, Travis Kalanick, appealed the judge’s arbitration ruling to the 2nd U.S. Circuit Court of Appeals, which agreed to expedite the case. Judge Rakoff, meanwhile, agreed (reluctantly) to stay the underlying antitrust class action until the 2nd Circuit decides whether the case belongs in arbitration.

Lawyers for the plaintiff, Spencer Meyer, filed Meyer’s appellate brief Tuesday. Their objective seems to be to convince the 2nd Circuit that Judge Rakoff’s ruling on arbitrability, for all of its rhetoric, is really just a straightforward application of the Circuit’s precedent on contracts and online consumer agreements. The 2nd Circuit, according to Meyer’s lawyers from Harter Secrest & Emery, Cafferty Clobes Meriwether & Sprengel and Constantine Cannon, established back in its 2002 decision in Specht v. Netscape that Internet businesses cannot bind customers to arbitration agreements merely by including a mandatory arbitration provision in licensing terms. The Specht decision, written by then Judge Sonia Sotomayor, put the 2nd Circuit in the vanguard of judicial skepticism toward so-called browsewrap agreements, in which businesses tried to impose terms on consumers without requiring consumer consent.

Browsewrap agreements have mostly given way to clickwrap contracts, which require customers actively to assent to terms of service, often by clicking a button that says “I agree,” or something similar. Since the 2002 Specht ruling, Meyer’s new brief said, the 2nd Circuit has never upheld the validity of a non-clickwrap online agreement. Most recently, in its ruling last August in Nicosia v. Amazon, a three-judge 2nd Circuit panel said Amazon had not indisputably bound a customer to arbitration via a notice – one of many on a very crowded page – that by clicking on the button to place an order, purchasers agreed to Amazon’s terms of use.

Uber’s agreement was a similar hybrid: The registration screen did not specifically require customers to assent to terms of services but advised prospective app users that by clicking on the registration button, they agreed to Uber’s terms, which customers could access via a hyperlink. As Meyer’s lawyers reminded the 2nd Circuit, Judge Rakoff looked at Uber’s screen and determined it didn’t do a good enough job of assuring that customers’ assent to its terms. “The district court’s findings below are consistent with this court’s observations and decision in Nicosia,” the brief said.

“The district court’s hostility to arbitration animated every aspect of its opinion, most notably its erroneous conclusion that plaintiff did not assent to the arbitration provisions in his user agreement,” Uber’s brief said. “In addition to flouting Supreme Court precedent regarding arbitration, the district court’s decision is out of step with the overwhelming weight of authority enforcing electronic agreements formed under circumstances that are virtually identical to those presented here.”

The Internet Association’s brief warned that Judge Rakoff’s opinion unsettled law that its members, including the biggest online retailers in the country, considered to be settled. It is also, the brief said, inconsistent with “the actual expectations and experiences of consumers and companies engaged in mobile contracting,” who have come to understand online agreements with hyperlinked terms of service. The Chamber is worried that Judge Rakoff’s opinion turned on its head the Federal Arbitration Act’s directive that arbitration provisions be treated no differently than any other piece of a contract. Judge Rakoff, according to the Chamber’s brief, subjected Uber’s arbitration to withering scrutiny under his admitted view that courts should indulge “every reasonable presumption” against contracts that require consumers to surrender their “precious and fundamental right” to go to court.

For what it’s worth, Uber told me federal district judges in Boston and Los Angeles have deemed its arbitration agreements with passenger to be enforceable. The 9th Circuit, as you probably recall, ruled in September that most of Uber’s arbitration agreements with drivers are valid. But the 2nd Circuit is apparently the first federal appeals court to review the company’s consumer contracts.

The appeals court has not yet set a date for oral arguments, according to the docket.